Feb. 19 (Bloomberg) -- As Credit Suisse Group AG sees it,
time has run out on New York Attorney General Eric
Schneiderman’s pursuit of Wall Street banks for mortgage fraud
that helped trigger the financial crisis.

Schneiderman sued Credit Suisse in 2012 as part of a wide-ranging probe into mortgage bonds. He claimed Switzerland’s
second-largest bank misrepresented the risks associated with
$93.8 billion in mortgage-backed securities issued in 2006 and
2007.

Credit Suisse asked a Manhattan judge in December to
dismiss Schneiderman’s case, as well as his demand for as much
as $11.2 billion in damages. The bank argued that New York, by
waiting so long to file the lawsuit, missed a three-year legal
deadline for suing. The state countered that it had six years to
file its complaint.

If the bank wins, Schneiderman will face a new roadblock as
he considers similar multibillion-dollar claims against a dozen
other Wall Street firms. The judge in New York State Supreme
Court could rule at any time.

“It would obviously tilt everything in the favor of Credit
Suisse and similarly situated financial institutions,” said
David Reiss, a professor at Brooklyn Law School, hindering New
York’s remaining efforts to hold banks accountable for mistakes
that spurred a recession.

Obstacles Posed

The obstacle posed by such statutes of limitation in
pursuing mortgage-bond cases may be traced back to Andrew Cuomo,
Schneiderman’s predecessor. Although now-Governor Cuomo didn’t
file any such cases against the banks, he announced a probe into
all aspects of the mortgage business in 2008.

In doing so, he may have started the clock ticking on how
long a state suit could be filed, making it impossible for
fellow Democrat Schneiderman to argue his office didn’t learn of
the bank’s conduct until he took office in 2011.

On Feb. 6, Credit Suisse said it was setting aside 514
million Swiss francs ($568 million) for legal issues, including
339 million francs for mortgage litigation. The bank may be
preparing to resolve a related bond insurer lawsuit, Mark
Palmer, an analyst with BTIG LLC in New York, said in a Feb. 10
note.

Matt Mittenthal, a spokesman for Schneiderman, and Dani
Lever, a spokeswoman for Cuomo, declined to comment on the
Credit Suisse case.

Filing Deadline

Schneiderman, 59, avoided a filing deadline dispute by
settling a mortgage-bond case with JPMorgan Chase & Co. last
year. The state got $613 million in that pact, New York’s share
of the landmark $13 billion federal-state accord with the
largest U.S. lender.

Armed with the Martin Act, New York’s powerful anti-fraud
tool, Schneiderman has said he is seeking settlements with the
other, unidentified banks.

In the lawsuit against Zurich-based Credit Suisse, filed in
November 2012, he claims the bank ignored warning signs about
the quality of loans it was packaging and selling. One example
cited was its use of New Century Financial Corp. mortgages after
that firm’s 2007 bankruptcy.

The attorney general’s lawsuit involves 64 Credit Suisse
bond offerings in 2006 and 2007. Credit Suisse has said the
losses on those offerings were only about half of the $11.2
billion claimed by Schneiderman.

One Credit Suisse executive described some of the mortgages
the bank sold as “complete and utter garbage,” according to
the complaint. The bank relied on mortgage originators that
“systematically abandoned underwriting standards in the years
leading up to the collapse of the housing market,” Schneiderman
said.

Thrown Out

Credit Suisse, which denies any wrongdoing, told Justice
Marcy S. Friedman Dec. 11 that the suit should be thrown out
because it was filed more than three years after the alleged
wrongdoing was discovered.

Consumer fraud and personal injury claims are generally
subject to a three-year statute of limitations under New York
law, while financial frauds can be granted six years.

The Martin Act has been previously held to have a six-year
limitation, lawyers for the attorney general argued. Credit
Suisse contends New York’s highest court held that the attorney
general must be able to show that investors relied on
misstatements by the bank and that it knowingly committed fraud
to get the longer time limit.

No such allegations of intentional fraud by the bank are
made in the lawsuit, according to Credit Suisse.

Latest Bonds

Since the latest bonds cited in Schneiderman’s suit
originated in 2006 and 2007, if the judge chooses the bank’s
argument, the lawsuit may be dismissed. If the judge takes
Schneiderman’s more expansive view, most or all of the suspect
bonds may still be covered by the litigation.

“The entire case is time-barred,” Richard Clary, a lawyer
for the bank, told Friedman at the December hearing. Lawyers for
the state argued that such limits weren’t intended to apply to
the attorney general.

So far, New York’s courts have broadly interpreted the
statute in finding a six-year period, Brooklyn Law School’s
Reiss said. That may be changing as legal scholars and financial
industry lawyers question its propriety.

“Having these incredibly long and ambiguous statutes of
limitations is not particularly fair,” he said.

Other Banks

Friedman’s ruling in the Credit Suisse case may be crucial
to Schneiderman’s probe of close to a dozen other banks, and
whether he can sue them successfully.

New York agreed with the firms in October 2012 that any
legal deadline for bringing fraud claims against them would be
suspended while he continues his investigation, a person
familiar with the matter said.

Such tolling agreements stopped the clock on any statute of
limitations and ensured Schneiderman can bring fraud claims
against banks for conduct going as far back as 2006, said the
person.

Brooklyn Law School’s Reiss said the banks may have agreed
to the delay to avoid forcing Schneiderman to file a “kitchen
sink complaint with every possible allegation in it” just to
beat the clock. Doing so also builds good will with regulators
and may also facilitate a favorable settlement.

The agreements don’t necessarily mean that suits will be
filed, the person said. If Schneiderman sues any of the banks,
they may then assert the statute of limitations is three years,
and not six, just as Credit Suisse has done.

Potent Argument

This may be a more potent argument if Friedman rules for
the Swiss bank in the pending case.

A three-year statute-of-limitations would mean they can’t
be held responsible for transactions before 2009, while a six-year deadline would allow Schneiderman to reach back to 2006.

There’s “great uncertainty” about whether Schneiderman
can move forward with the Credit Suisse case in light of the
statute of limitations arguments, said James Cox, a corporate
law professor at Duke University in Durham, North Carolina.

Reiss said that any ruling would probably be challenged all
the way to the Court of Appeals in Albany, the state’s highest
court.

By 2006, about 40 percent of all mortgage loans issued in
the U.S. were either subprime or alt-A, meaning lenders required
no proof of income from borrowers, according to a report from
the Center for Responsible Lending. Most were packaged into
securities, according to the center.

Legal Expenses

U.S. banks have yet to see an end to their expenses tied to
home loans that soured when the housing market slumped and
prompted 2008’s market turmoil. The six largest U.S. lenders
have allocated more than $114 billion since the crisis to cover
legal expenses, government probes and investor claims, much of
which stemmed from mortgage-related liabilities.

JPMorgan snapped three straight years of record profits in
2013 after reaching the $13 billion deal to resolve inquiries
into mortgage-bond sales.

Regardless of how Friedman rules, Credit Suisse’s argument
may have already borne fruit for bank defenders.

New York’s lawyers have acknowledged in court filings that
transactions before early March 2006 are too old and should be
excluded from the case, wiping out about $1 billion in potential
damages.

The case is People of the State of New York v. Credit
Suisse Securities (USA) LLC, 451802-2012, New York State Supreme
Court, New York County (Manhattan).

To contact the reporters on this story:
Christie Smythe in federal court in Brooklyn, New York, at